For many, the idea of estate planning means preparing for what happens after death. But executing your estate plan may be possible well before death. Outside of the satisfaction of seeing your beneficiaries enjoy the gifts during your lifetime, distributing assets while alive may provide additional benefits than waiting until a will is invoked.
Since Canada does not have a gift tax (unlike the U.S.), assets can be gifted by you and received by the beneficiary tax free. However, if your gift is not in cash but in the form of assets that may have appreciated in value, such as real estate or marketable securities, you will be considered to have disposed of the assets at fair market value at the time of gifting which may result in a capital gains tax liability.
Minimize Taxes During Your Lifetime — If your adult child or grandchild beneficiary is in a lower tax bracket than you, it may be beneficial to transfer investable assets to them during your lifetime. Any annual investment income will be taxed at their lower marginal tax rate instead of at your higher marginal rate, reducing the overall family tax bill. Gifts to spouses or related minor children may result in negative tax consequences to you because any income generated from the gifted property or capital gains from gifts to your spouse can be attributed back to you.
Reduce Taxes at Death — Gifting assets during your lifetime can reduce the size of your estate and the potential capital gains taxes that arise upon death. In addition, reducing the size of your estate during your lifetime can generally help to reduce or avoid probate or estate administration tax in provinces where applicable.
Maximize Charitable Donation Credits — If part of your estate plan is to provide assets to a charitable organization, you may receive greater tax benefits by making gifts annually and using the charitable donation credits to reduce your tax liability during your lifetime as opposed to having a large donation credit at death which may not be fully utilized.
Many factors may impact your decision to make gifts during your lifetime, including the amount of assets needed to maintain a certain standard of living, the difference between your marginal tax rate and your beneficiary’s current/future marginal tax rate and whether or not your will is subject to probate or estate administration tax. Please consult a tax advisor to discuss your particular situation.